Here’s how sought-after home buyers can capitalize on the crunch.
NO LARGE DOWN payment? Lenders are regularly making loans for up to 97 percent of a home’s value, and will go further for strong earners willing to pony up $20 or $30 a month in extra mortgage insurance.
North American Mortgage Co. offers Californians “Generation Link,” a loan that allows them to borrow up to 100 percent of a home’s value if they can talk a relative into guaranteeing 10 percent of it. Some local lenders, like Third Federal Bank in Cleveland, will eat closing costs, too.
And don’t lose sleep worrying if you’ll qualify. Old rules that held your housing costs to 28 percent of your gross income have been stretched to 33 percent. Lenders who used to hold borrowers’ total debt payments to 36 percent of their monthly gross income now aim at 38 percent, and FHA-backed lenders push that all the way to 41 percent. What’s more, these really aren’t rules anymore, just “guidelines” that can be ignored at a lender’s discretion, says Brian Chappelle of the Mortgage Bankers of America.
All this flexibility comes for a fee: these easy-in products usually carry higher rates that can add $50 or more to the monthly payment on a typical $100,000 loan, so they work best for first time buyers or nice-salary, no-savings Yuppies. And even they should think twice about going to the limit: just because a banker will let you get in over your head doesn’t mean you have to. Remember to save a few bucks for homeowner hobbies like planting and plumbing.
NEW CHOICES IN adjustable-rate mortgages can make you feel like you are dining trendy: the menus are very long and seem to be written in another language.
It’s not unusual for lenders to offer 10 or more varieties of variables with catchy names and different catches. GMAC Mortgage’s “Power Source” plan lets customers pick among loans that adjust annually, every six months after a three year fix, every year after a seven-, eight- or nine-year fix or just once after staying locked for seven, eight or nine years. North American Mortgage Co. offers close to 20 ARMs nationally on a menu that claims “1,110 pricing options.”
Borrowers now face loans with five variables or more: they can pick the index their rates track, select the frequency with which their rates change, target adjustment and life-of-loan caps and lower monthly payments with higher up front closing costs. Picking the right index is an art. Instead of sticking with the standard one-, three- or five-year Treasury rates, borrowers can track the lower but volatile London InterBank Offered Rate (LIBOR) or the cost of funds index for Western banks in the Federal Reserve’s llth district. That’s popular because it relies on rates banks pay on deposits, and we all know how slowly they rise. In the second half of 1994, LIBOR rates rose four times faster than the cost of funds index.
Crunch carefully: David Ginsburg, whose Gaithersburg, Md., firm Loantech analyzes mortgages for a fee, says the best rate probably isn’t the best deal. Volatile indexes and rapid adjustments can quickly eat up early savings if rates rise. The typical ARM customer who intends to move in five or 10 years may never stick around long enough to make the highpoints/low-rate tradeoff pay. Ginsburg cautions borrowers to beware rate “floors” set at the starter rate or just below where you’re getting in: when rates fell in 1993, many ARM-paying homeowners were surprised to find their loans couldn’t move down with the market.
For the best deal in ARMS, go to a savings bank that’s hungry to build its own loan portfolio. Avoid mortgage brokers who sell loans to buyers like the Federal National Mortgage Administration; they aren’t rewarded for pricing aggressively, admits David Berson, Fannie Mae’s chief economist. Smart, long-term shoppers may choose to avoid the ARM aggravation altogether now that fixed rate loans are so competitive. Or they can choose one of the popular 7/23 combos: these loans offer interest-rate breaks for borrowers willing to lock in for seven years and then let their rates vary. By then, many homeowners will have moved on anyway.
GET READY FOR monthly mortgage relief from another source: the Department of Housing and Urban Development is cutting back on the amount of money your lender can hold in an escrow account to pay your real estate taxes and insurance. Homeowners lose when they have to tie up extra dollars in these accounts, which rarely pay interest, and lenders have been sloppy about cutting these accounts to the bone: now they’ll have to. HUD expects consumers to save $1.5 billion as the rules phase in over three years, and many homeowners may start getting checks of $50 or more if their lender has accumulated too comfortable a cushion. If you’re settling after May 24 when the rules kick in for new loans, you may be able to bring $250 less to the table than you would have under the old rules, says HUD.
